McGraw-Hill © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Six

Analyzing Cash Flow and Other

Financial Information

McGraw-Hill © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Outcomes6.1 Recognize the fundamental

importance of Cash Flow Analysis6.2 Prepare a Cash Flow Statement

and a Budget6.3 Identify other financial tools

6-2

McGraw-Hill © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Cash FlowThe author defines Cash Flow as

“actual cash that flows into the firm, minus the cash that goes out of the

firm.”

6-3

McGraw-Hill © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Understanding Cash Flow• The role of the Cash Flow Statement

developed in the due diligence stage of a fledgling venture is substantially different from the financial analysis developed for an ongoing firm.

• The viability of a new business will be determined by Cash Flow.

6-4

McGraw-Hill © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Cash Flow Versus BudgetsBudgetexample:

6-5

McGraw-Hill © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Cash Flow Versus BudgetsCash Flowexample:

6-6

McGraw-Hill © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Finalized Example Cash Flow Statement6-7

McGraw-Hill © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Deviation AnalysisDeviationAnalysis-

analysis of the differences between the predicted and the actual performance.

6-8

McGraw-Hill © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Developing Cash Flow Statements: Expenses

• Salaries• Basic Benefits• Taxes/Fees• Cost of Goods Sold• Utilities• Security System• Tools/Machinery• Office Supplies• Travel Expenses

• Insurance• Advertising• Furniture and

Computers• Telephones• Maintenance• Cleaning• Rent/Mortgage

6-9

McGraw-Hill © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Developing Cash Flow Statements: Revenues

6-10

McGraw-Hill © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Other Financial Tools• Balance Sheet-a summary of the

assets and liabilities of the business• Income Statement-projects the future

income of the organization• Break–Even Analysis-a tool for

estimating when a business’s income exceeds is expenses

• Pro Forma-a term describing estimates of what the balance sheets and income statement will look like

6-11

McGraw-Hill © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Break-Even AnalysisClassic Break-Even Diagram

6-12

McGraw-Hill © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Break-Even AnalysisEntrepreneurial Break-Even

Diagram

6-13

McGraw-Hill © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Summary• Cash Flow Statements-including

inputs and outputs• We examined a Balance Sheet and

an Income Statement• Brief examination of

Entrepreneurial Break-Even Analysis.

6-14